The market sent Apple Inc. (NASDAQ:AAPL) shares lower on news that Foxconn, a key supplier of the company’s products, had stopped hiring. While Apple has some notable problems to address, this may not be as big a deal as the market has suggested.
Apple’s Big Problem
The issue that Apple is facing is market saturation. Indeed, in the developed world, Apple may have grown as large as it can with its existing product lineup. Sure, the iPhone and iPad are incredible offerings, but so, too, is the Samsung Galaxy line of products. There are fewer and fewer people still left to convert from “older” technology to the cutting edge.
Since Apple Inc. (NASDAQ:AAPL) is basically a device maker, that means it either needs to find new markets into which it can expand or create yet another hot new device. Both are getting harder and harder to accomplish.
Based on Apple’s size and market penetration, the only new market of any scale that could move the needle would be Asia, most notably China. So far, it hasn’t been able to break into that market in a meaningful way. New devices are even more vexing, with the iWatch rumor showing just how uninspiring the potential here may be.
Is Foxconn A Canary?
That begs the question of how bad is it? That’s a rough one to answer and investors are looking for any clue since Apple’s shares have traded down sharply. There’s no question that Apple is a great company that a lot of people would like to own, but no one wants to buy a falling knife. If things are set to get worse, buying now would be a pretty bad call.
So, when an important partner announced that it was going to stop hiring, the quick reaction was that Apple Inc. (NASDAQ:AAPL), which represents about a third of Foxconn’s business, was struggling. However, that may or may not be true, it’s kind of hard to tell.
For starters, Foxconn attributes the hiring freeze to the fact that more workers than expected have returned after the Lunar New Year celebration. While it is hard to imagine not returning to work after a holiday break in this country, China is a whole different world and at a vastly different point in its development. Industrialization is a hard process, involving poor workers from rural areas moving to the cities to find work. For some, that change, in the end, may not be worth it.
In addition, Foxconn has other customers, including struggling Hewlett-Packard Company (NYSE:HPQ). HP just reported numbers that pleased much of Wall Street, sending its shares notably higher. But its sales were still down, just not down as much as people expected. So HP isn’t out of the woods by any stretch of the imagination—a fact that new CEO Meg Whitman admitted, “…there’s still a lot of work to do to generate the kind of growth we want to see…”
So, combining the increased employee return rate with the potential that HP orders slowed, could mean that Apple wasn’t the reason for the hiring freeze at all. Note, too, that Apple has begun to broaden its supplier network.